Sunday, March 23, 2008

Federal Reserve's boldest action since Great Depression

The Federal Reserve is the only U.S. institution with the authority and ability to create money out of thin air. And the FED has taken its boldest action since the Great Depression, invoking rarely used powers in an effort to contain a panic threatening to undermine the economy.

Because of the Fed's direct influence over interest rates, the money supply, and the larger economy, some have called the Fed chairman the second most powerful job in Washington after the president.

But the Fed's moves are raising questions about its regulatory powers. In one remarkable week, the Fed:--engineered the fire sale of bankruptcy-headed Bear Stearns Cos. to J.P. Morgan Chase & Co. with a $30 billion loan.--offered emergency loans to other securities dealers under terms normally reserved for regulated banks.--slashed a key short-term interest rate by three quarters of a percentage point, to 2.25 percent. The cut was sixth since September.

These steps followed moves to lend $100 billion in cash to banks, and $200 billion in Treasury bonds to cash-strapped investment banks.

"I spent 35 years on Wall Street, have been a Fed watcher for a long time and I have never seen the potential for a more severe credit crisis than this one," said David Jones, chief economist at DMJ Advisors and a former Wall Street economist.